Comprehension : Comprehension

Q 360 / 466

UPSC CSE Prelims 2013

Read the following passage and answer the items that follow. Your answers to these items should be based on the passage only.
Financial markets in India have acquired greater depth and liquidity over the years. Steady reforms since 1991 have led to growing linkages and its financial system with the global economy. Weak global economic prospects and continuing uncertainties in the international financial markets therefore, have had their impact on the emerging market economies. Sovereign risk concerns particularly in the Euro area, affected financial markets for the greater part of the year with contagion of Greece’s sovereign debt problem spreading to India and other economies by way of higher-than-normal levels of volatility.
The funding constraints in international financial markets could impact both the availability and cost of foreign funding for banks and corporates. Since the Indian financial system is bank dominated, banks ability to withstand stress is critical to overall financial stability. Indian banks, however remains robust, not with standing a decline in capital to risk weighed assets ratio and a raise in nonperforming asset levels in the recent past. Capital adequacy levels remain above the regularity requirements. The financial market infrastructure continues to function without any major disruption. With further globalization, consolidation, deregulation and diversification of these financial systems, the banking business may become more complex and riskier. Issues like risk and liquidity management and enhancing skill therefore assume greater significance.

According to the passage, in the Indian financial system, banks ability to withstand stress is critical to ensure overall financial stability because Indian financial system is:

EXPLANATION

Correct Option (4)

The passage explicitly states, "Since the Indian financial system is bank dominated, banks ability to withstand stress is critical to overall financial stability." This directly indicates that the dominance of banks within the financial system is the reason for their critical role in ensuring overall financial stability.

Incorrect Options:

  • Option 1 (controlled by the Government of India): The passage does not attribute the criticality of banks to government control. While the government plays a role in the financial system, the specific reason cited in the passage for banks' importance is their dominant position.
  • Option 2 (less integrated with banks): This statement contradicts the premise that banks' ability to withstand stress is critical. The passage implies a central and significant role for banks, not a diminished integration.
  • Option 3 (controlled by Reserve Bank of India): Although the Reserve Bank of India regulates the financial system, the passage does not identify RBI control as the reason for the criticality of banks' ability to withstand stress. The passage specifically highlights the "bank dominated" nature of the system.